Arnold lost his initiative efforts a few years ago. This was a true shame. His effort to end gerrymandering would have been profoundly positive for the political process. Instead we continue the ossification of Sacramento, legislators have lockholds on their respective districts. He also lost his battle with the unions. So he became kittywhipped and started acting/voting/talking like his wife.

IIRC real spending has increased 40% during Arnold's term!!!

We vote for seriously stupid stuff (e.g. the super train between LA and SF) all the time, can't vote out the bums, and so now we have this.

To punish us for our temerity, the first thing the ruling class will do will be to cut schools, and release criminals. However, the high speed rail line, which makes no fcuking sense whatsoever but will cost billions of dollars, well, that will stay.

The Obama administration is bent on becoming a major player in -- if not taking over entirely -- America's health-care, automobile and banking industries. Before that happens, it might be a good idea to look at the government's track record in running economic enterprises. It is terrible.

In 1913, for instance, thinking it was being overcharged by the steel companies for armor plate for warships, the federal government decided to build its own plant. It estimated that a plant with a 10,000-ton annual capacity could produce armor plate for only 70% of what the steel companies charged.

When the plant was finally finished, however -- three years after World War I had ended -- it was millions over budget and able to produce armor plate only at twice what the steel companies charged. It produced one batch and then shut down, never to reopen.

Or take Medicare. Other than the source of its premiums, Medicare is no different, economically, than a regular health-insurance company. But unlike, say, UnitedHealthcare, it is a bureaucracy-beclotted nightmare, riven with waste and fraud. Last year the Government Accountability Office estimated that no less than one-third of all Medicare disbursements for durable medical equipment, such as wheelchairs and hospital beds, were improper or fraudulent. Medicare was so lax in its oversight that it was approving orthopedic shoes for amputees.

These examples are not aberrations; they are typical of how governments run enterprises. There are a number of reasons why this is inherently so. Among them are:

1) Governments are run by politicians, not businessmen. Politicians can only make political decisions, not economic ones. They are, after all, first and foremost in the re-election business. Because of the need to be re-elected, politicians are always likely to have a short-term bias. What looks good right now is more important to politicians than long-term consequences even when those consequences can be easily foreseen. The gathering disaster of Social Security has been obvious for years, but politics has prevented needed reforms.

And politicians tend to favor parochial interests over sound economic sense. Consider a thought experiment. There is a national widget crisis and Sen. Wiley Snoot is chairman of the Senate Widget Committee. There are two technologies that are possible solutions to the problem, with Technology A widely thought to be the more promising of the two. But the company that has been developing Technology B is headquartered in Sen. Snoot's state and employs 40,000 workers there. Which technology is Sen. Snoot going to use his vast legislative influence to push?

2) Politicians need headlines. And this means they have a deep need to do something ("Sen. Snoot Moves on Widget Crisis!"), even when doing nothing would be the better option. Markets will always deal efficiently with gluts and shortages, but letting the market work doesn't produce favorable headlines and, indeed, often produces the opposite ("Sen. Snoot Fails to Move on Widget Crisis!").

3) Governments use other people's money. Corporations play with their own money. They are wealth-creating machines in which various people (investors, managers and labor) come together under a defined set of rules in hopes of creating more wealth collectively than they can create separately.

So a labor negotiation in a corporation is a negotiation over how to divide the wealth that is created between stockholders and workers. Each side knows that if they drive too hard a bargain they risk killing the goose that lays golden eggs for both sides. Just ask General Motors and the United Auto Workers.

But when, say, a school board sits down to negotiate with a teachers union or decide how many administrators are needed, the goose is the taxpayer. That's why public-service employees now often have much more generous benefits than their private-sector counterparts. And that's why the New York City public school system had an administrator-to-student ratio 10 times as high as the city's Catholic school system, at least until Mayor Michael Bloomberg (a more than competent businessman before he entered politics) took charge of the system.

4) Government does not tolerate competition. The Obama administration is talking about creating a "public option" that would compete in the health-insurance marketplace with profit-seeking companies. But has a government entity ever competed successfully on a level playing field with private companies? I don't know of one.

5) Government enterprises are almost always monopolies and thus do not face competition at all. But competition is exactly what makes capitalism so successful an economic system. The lack of it has always doomed socialist economies.

When the federal government nationalized the phone system in 1917, justifying it as a wartime measure that would lower costs, it turned it over to the Post Office to run. (The process was called "postalization," a word that should send shivers down the back of any believer in free markets.) But despite the promise of lower prices, practically the first thing the Post Office did when it took over was . . . raise prices.

Cost cutting is alien to the culture of all bureaucracies. Indeed, when cost cutting is inescapable, bureaucracies often make cuts that will produce maximum public inconvenience, generating political pressure to reverse the cuts.

6) Successful corporations are run by benevolent despots. The CEO of a corporation has the power to manage effectively. He decides company policy, organizes the corporate structure, and allocates resources pretty much as he thinks best. The board of directors ordinarily does nothing more than ratify his moves (or, of course, fire him). This allows a company to act quickly when needed.

But American government was designed by the Founding Fathers to be inefficient, and inefficient it most certainly is. The president is the government's CEO, but except for trivial matters he can't do anything without the permission of two separate, very large committees (the House and Senate) whose members have their own political agendas. Government always has many cooks, which is why the government's broth is so often spoiled.

7) Government is regulated by government. When "postalization" of the nation's phone system appeared imminent in 1917, Theodore Vail, the president of AT&T, admitted that his company was, effectively, a monopoly. But he noted that "all monopolies should be regulated. Government ownership would be an unregulated monopoly."

It is government's job to make and enforce the rules that allow a civilized society to flourish. But it has a dismal record of regulating itself. Imagine, for instance, if a corporation, seeking to make its bottom line look better, transferred employee contributions from the company pension fund to its own accounts, replaced the money with general obligation corporate bonds, and called the money it expropriated income. We all know what would happen: The company accountants would refuse to certify the books and management would likely -- and rightly -- end up in jail.

But that is exactly what the federal government (which, unlike corporations, decides how to keep its own books) does with Social Security. In the late 1990s, the government was running what it -- and a largely unquestioning Washington press corps -- called budget "surpluses." But the national debt still increased in every single one of those years because the government was borrowing money to create the "surpluses."

Capitalism isn't perfect. Indeed, to paraphrase Winston Churchill's famous description of democracy, it's the worst economic system except for all the others. But the inescapable fact is that only the profit motive and competition keep enterprises lean, efficient, innovative and customer-oriented.

Mr. Gordon is the author of "An Empire of Wealth: The Epic History of American Economic Power" (HarperCollins, 2004).

Brazil and China will work towards using their own currencies in trade transactions rather than the US dollar, according to Brazil’s central bank and aides to Luiz Inácio Lula da Silva, Brazil’s president. The move follows recent Chinese challenges to the status of the dollar as the world’s leading international currency.

Mr Lula da Silva, who is visiting Beijing this week, and Hu Jintao, China’s president, first discussed the idea of replacing the dollar with the renminbi and the real as trade currencies when they met at the G20 summit in London last month.

An official at Brazil’s central bank stressed that talks were at an early stage. He also said that what was under discussion was not a currency swap of the kind China recently agreed with Argentina and which the US had agreed with several countries, including Brazil.

“Currency swaps are not necessarily trade related,” the official said. “The funds can be drawn down for any use. What we are talking about now is Brazil paying for Chinese goods with reals and China paying for Brazilian goods with renminbi.”

Henrique Meirelles and Zhou Xiaochuan, governors of the two countries’ central banks, were expected to meet soon to discuss the matter, the official said.

Mr Zhou recently proposed replacing the US dollar as the world’s leading currency with a new international reserve currency, possibly in the form of special drawing rights (SDRs), a unit of account used by the International Monetary Fund.

In an essay posted on the People’s Bank of China’s website, Mr Zhou said the goal would be to create a reserve currency “that is disconnected from individual nations”.

The euro's share in Russia's forex reserves, the world's third-largest, overtook that of the dollar last year as the country pressed on with a gradual diversification, the Central Bank's annual report showed.

The euro's share increased to 47.5 percent as of Jan. 1 from 42.4 percent a year ago, according to the report, which was submitted to the State Duma on Monday.

The dollar's share fell to 41.5 percent from 47 percent at the start of 2008 and 49 percent at the start of 2007.

As Brad points out:

It is often asserted that the dollar is the global reserve currency. It would be more accurate to say the dollar is the globe’s leading reserve currency.* The dollar is the dominant reserve currency in Northeast Asia. And the two big economies of Northeast Asia both happen to both hold far more reserves than either really needs. The dollar is also the reserve currency of the Gulf. And Latin America.**

But the dollar isn’t the dominant reserve currency along the periphery of the eurozone. Most European countries that aren’t part of the euro area now keep most of their reserves in euros. That makes sense. Most trade far more with Europe than the US – and some, especially in Eastern Europe, ultimately want to join the eurozone.

SÃO PAULO -- Brazil's oil industry is turning to China for cash in the latest sign of how Beijing's clout is growing amid the global economic downturn. Brazilian President Luiz Inácio Lula da Silva was set to arrive in Beijing Monday to meet with Chinese President Hu Jintao, who is expected to unleash billions of dollars of credit to help Brazil exploit its massive oil reserves. Brazil will return the favor by guaranteeing oil shipments to Chinese companies.

The nations are being thrust together by the global financial crisis. Brazil's state-controlled oil giant, Petroleo Brasileiro SA, wants to spend $174 billion over the next five years to elevate Brazil into the major leagues of oil-producing nations. With international capital markets on life support, China is among the few remaining sources of cash.

Petrobras, as the company is known, is turning to China at a time when China's appetite for raw materials has lifted economies across commodity-rich Latin America, blunting the impact of the global downturn. In March, China passed the U.S. as Brazil's biggest trade partner.

This is a big deal. Today’s action with falling equities, falling bond prices, and a falling dollar (with sharply rising gold prices in dollar terms) pretty much boxes Bernanke and little Timmy Geithner in. The American way of life is about to change whether we like it or not.

Notice that no shots were fired, no one sent up a balloon saying “Russia no longer uses the dollar as a reserve currency!” No, it happened slowly and subtly. (ht Comrade)Russia Dumps the U.S. Dollar for Euro as Reserve Currency

The US dollar is not Russia’s basic reserve currency anymore. The euro-based share of reserve assets of Russia’s Central Bank increased to the level of 47.5 percent as of January 1, 2009 and exceeded the investments in dollar assets, which made up 41.5 percent, The Vedomosti newspaper wrote.

The dollar has thus lost the status of the basic reserve currency for the Russian Central Bank, the annual report, which the bank provided to the State Duma, said.

In accordance with the report, about 47.5 percent of the currency assets of the Russian Central Bank were based on the euro, whereas the dollar-based assets made up 41.5 percent as of the beginning of the current year. The situation was totally different at the beginning of the previous year: 47 percent of investments were made in US dollars, while the euro investments were evaluated at 42 percent.

The dollar share had increased to 49 percent and remained so as of October 1. The euro share made up 40 percent. The rest of investments were based on the British pound, the Japanese yen and the Swiss frank.

The report also said that the reserve currency assets of the Russian Central Bank were cut by $56.6 billion. The losses mostly occurred at the end of the year, when the Central Bank was forced to conduct massive interventions to curb the run of traders who rushed to buy up foreign currencies. The currency assets of the Central Bank had grown to $537.6 billion by October 2008. Therefore, the index dropped by almost $133 billion within the recent three months.

The majority of Russian companies, banks and most of the Russian population started to purchase enormous amounts of foreign currencies at the end of 2008. The dollar gained 16 percent and the euro 13.5 percent over the fourth quarter. The demand on the US dollar was extremely high, and the Central Bank was forced to spend a big part of its dollar assets, experts say.

The change of the structure of the currency portfolio of the Bank of Russia has not affected the official peg of the dual currency basket, which includes $0.55 and 0.45 EUR.The investments of the Bank of Russia in state securities of foreign issuers have been considerably increased, the report said. About a third of Russia’s international reserves are based on US Treasury bonds.

Russia became one of the largest creditors of the US administration last year, the US Department of the Treasury said. Russia increased its investments in the debt securities of the US Treasury from $32.7 billion as of December 2007 to $116.4 billion as of December 2008.

If that little development doesn’t bother you, then how about the possibility of the U.S. losing her AAA credit rating?:Dollar Is Dirt, Treasuries Are Toast, AAA Is Gone

OBAMA’S CREDIT CARD REFORM IS A FRAUDBy Dick Morris And Eileen McGann 05.22.2009 The widely heralded credit card reform legislation making its way through Congress is a sellout to the credit card companies. Obama has proposed and Congress has passed a series of minor reforms that deal with the fringes of the problem - late billings, retroactive interest rate hikes, misapplication of payments and such - but fail to reform the most basic offense of the companies: their usury.

Congress explicitly rejected any limitation on the interest rate credit card companies can charge. It remains perfectly legal for them to charge rates that would make a loan shark blush.In our book Fleeced, we explain how, until 1979, credit card interest was subject to usury limits of the various states. But the Supreme Court emasculated these limits by ruling that the state of the lender, not of the borrower, had the sole power to legislate interest rate limits. South Dakota swiftly jumped into the void the Court created, eliminating any usury limits. All the credit card companies moved there and took advantage of the regulatory vacuum to hike up their rates to unconscionable levels.

Competition can do nothing to force down rates since 90% of the credit cards are issued by a handful of companies. And states are paralyzed when it comes to regulating rates.

It is up to Congress to act. Yet the credit card companies’ massive campaign donations succeeded in buying off enough Democrats and virtually all the Republicans to kill any limits on interest rates. So companies can continue to charge basic rates of 18 percent and then up to 30 percent as punishment for minor offenses like being a few days late in making payments.

But Obama and his Democratic allies are loudly proclaiming their success in fighting for the consumer despite their failure to use their majorities to afford any real protection form usurious interest rates.

Congress should have legislated a ceiling on regular interest rates limiting them to five points above prime and on punitive rates requiring them to be no more than ten points above prime. But Obama and the Democrats (and, of course, the Republicans) caved into the special interests and left out any interest rate controls.

The high rates charged by credit card companies obviously do a great deal to impede consumer spending and drive families into bankruptcy. The average credit card balance for those who have such debt is over $13,000. A 30 percent interest rate means more than $300 per month in interest payments alone!

It is cruel to see Obama offering the illusion of hope for credit card victims while denying them real relief.

May 22 (Bloomberg) -- Treasury Secretary Timothy Geithner committed to cutting the budget deficit as concern about deteriorating U.S. creditworthiness deepened, and ascribed a sell-off in Treasuries to prospects for an economic recovery.

“It’s very important that this Congress and this president put in place policies that will bring those deficits down to a sustainable level over the medium term,” Geithner said in an interview with Bloomberg Television yesterday. He added that the target is reducing the gap to about 3 percent of gross domestic product, from a projected 12.9 percent this year.

The dollar extended declines today after Treasuries and American stocks slumped on concern the U.S. government’s debt rating may at some point be lowered. Bill Gross, the co-chief investment officer of Pacific Investment Management Co., said the U.S. “eventually” will lose its AAA grade.

Geithner, 47, also said that the rise in yields on Treasury securities this year “is a sign that things are improving” and that “there is a little less acute concern about the depth of the recession.”

Gross said in an interview yesterday on Bloomberg Television that while a U.S. sovereign rating cut is “certainly nothing that’s going to happen overnight,” markets are “beginning to anticipate the possibility.” Nobel Prize-winning economist Paul Krugman, speaking in Hong Kong today, nevertheless argues it’s “hard to believe” the U.S. would ever default.

It’s “critically important” to bring down the American deficit, Geithner said.

In its latest budget request, the administration said it expects the deficit to drop to 8.5 percent of GDP next year, then to 6 percent in 2011. Ultimately, it forecasts deficits that fluctuate between 2.7 percent and 3.4 percent between 2012 and 2019.

Early Stages

Ten-year Treasury yields have climbed about 1 percentage point so far this year, in part after U.S. economic figures indicated that the worst of the deepest recession in half a century has passed. The yield on 30-year bonds has jumped to 4.31 percent, from 2.68 percent at the beginning of the year.

The Treasury chief said it’s still “possible” that the unemployment rate may reach 10 percent or higher, cautioning that the economic recovery is still in the “early stages.”

“The important thing to recognize is that growth will stabilize and start to increase first before unemployment peaks and starts to come down,” he said. While “these early signs of stability are very important” this is “still a very challenging period for businesses and families across the United States,” he said.

Initial claims for unemployment insurance fell by 12,000 in the week ended May 16 to 631,000, according to Labor Department statistics released yesterday. Still, the number of workers collecting unemployment checks rose to a record of more than 6.6 million in the week ended May 9.

As of April, the unemployment rate was 8.9 percent, the highest level since 1983. The economy has lost 5.7 million jobs since the recession started in December 2007.

Municipal Bonds

Also yesterday, Geithner said the U.S.’s $700 billion financial rescue package can’t be used to aid cities and states facing budget crises.

The law “does not appear to us to provide a viable way of responding to that challenge,” Geithner told a House Appropriations subcommittee in Washington. Among the hurdles: money from the Troubled Asset Relief Program was designed for financial companies, he said.

Geithner said he will work with Congress to help states such as California that have been battered by the credit crunch and are struggling to arrange backing for municipal bonds and short-term debt.

The municipal bond markets are “starting to find some new balance and equilibrium,” he said.

Standard and Poor’s decision to downgrade its outlook for British sovereign debt from “stable” to “negative” should be a wake-up call for the US Congress and administration. Let us hope they wake up.

Under President Barack Obama’s budget plan, the federal debt is exploding. To be precise, it is rising – and will continue to rise – much faster than gross domestic product, a measure of America’s ability to service it. The federal debt was equivalent to 41 per cent of GDP at the end of 2008; the Congressional Budget Office projects it will increase to 82 per cent of GDP in 10 years. With no change in policy, it could hit 100 per cent of GDP in just another five years.

“A government debt burden of that [100 per cent] level, if sustained, would in Standard & Poor’s view be incompatible with a triple A rating,” as the risk rating agency stated last week.

I believe the risk posed by this debt is systemic and could do more damage to the economy than the recent financial crisis. To understand the size of the risk, take a look at the numbers that Standard and Poor’s considers. The deficit in 2019 is expected by the CBO to be $1,200bn (€859bn, £754bn). Income tax revenues are expected to be about $2,000bn that year, so a permanent 60 per cent across-the-board tax increase would be required to balance the budget. Clearly this will not and should not happen. So how else can debt service payments be brought down as a share of GDP?

Inflation will do it. But how much? To bring the debt-to-GDP ratio down to the same level as at the end of 2008 would take a doubling of prices. That 100 per cent increase would make nominal GDP twice as high and thus cut the debt-to-GDP ratio in half, back to 41 from 82 per cent. A 100 per cent increase in the price level means about 10 per cent inflation for 10 years. But it would not be that smooth – probably more like the great inflation of the late 1960s and 1970s with boom followed by bust and recession every three or four years, and a successively higher inflation rate after each recession.

The fact that the Federal Reserve is now buying longer-term Treasuries in an effort to keep Treasury yields low adds credibility to this scary story, because it suggests that the debt will be monetised. That the Fed may have a difficult task reducing its own ballooning balance sheet to prevent inflation increases the risks considerably. And 100 per cent inflation would, of course, mean a 100 per cent depreciation of the dollar. Americans would have to pay $2.80 for a euro; the Japanese could buy a dollar for Y50; and gold would be $2,000 per ounce. This is not a forecast, because policy can change; rather it is an indication of how much systemic risk the government is now creating.

Why might Washington sleep through this wake-up call? You can already hear the excuses.

“We have an unprecedented financial crisis and we must run unprecedented deficits.” While there is debate about whether a large deficit today provides economic stimulus, there is no economic theory or evidence that shows that deficits in five or 10 years will help to get us out of this recession. Such thinking is irresponsible. If you believe deficits are good in bad times, then the responsible policy is to try to balance the budget in good times. The CBO projects that the economy will be back to delivering on its potential growth by 2014. A responsible budget would lay out proposals for balancing the budget by then rather than aim for trillion-dollar deficits.

“But we will cut the deficit in half.” CBO analysts project that the deficit will be the same in 2019 as the administration estimates for 2010, a zero per cent cut.

“We inherited this mess.” The debt was 41 per cent of GDP at the end of 1988, President Ronald Reagan’s last year in office, the same as at the end of 2008, President George W. Bush’s last year in office. If one thinks policies from Reagan to Bush were mistakes does it make any sense to double down on those mistakes, as with the 80 per cent debt-to-GDP level projected when Mr Obama leaves office?

The time for such excuses is over. They paint a picture of a government that is not working, one that creates risks rather than reduces them. Good government should be a nonpartisan issue. I have written that government actions and interventions in the past several years caused, prolonged and worsened the financial crisis. The problem is that policy is getting worse not better. Top government officials, including the heads of the US Treasury, the Fed, the Federal Deposit Insurance Corporation and the Securities and Exchange Commission are calling for the creation of a powerful systemic risk regulator to reign in systemic risk in the private sector. But their government is now the most serious source of systemic risk.

The good news is that it is not too late. There is time to wake up, to make a mid-course correction, to get back on track. Many blame the rating agencies for not telling us about systemic risks in the private sector that lead to this crisis. Let us not ignore them when they try to tell us about the risks in the government sector that will lead to the next one.

The writer, a professor of economics at Stanford and a senior fellow at the Hoover Institution, is the author of ‘Getting Off Track: How Government Actions and Interventions Caused, Prolonged, and Worsened the Financial Crisis’

In 1994, 10 percent of American pigs lived out their brief lives in vast factory farms. Only seven years later, in 2001, 72 percent did. The percentage is even higher today. It's now known the virus that caused the swine flu outbreak in Mexico is a direct descendant of one that was first identified on an industrial-scale pig-raising facility in North Carolina in 1998.

Human beings were hardly prey to any severe epidemic diseases at all until they started domesticating animals around 10,000 years ago. Hunter-and-gatherer groups of a 100 or less were a poor target for diseases that killed their hosts fast, for they would quickly run out of potential hosts and die off themselves.

The giant corporations that drove most small hog-breeders out of business in the United States are now active all over the world. They are the ideal environment to maximize new mutations among diseases.

Just like entering a war with no exit plan, government "involvement" in private enterprise will prove to be just as disastrous, if not more so.

In fact, this is truly nation changing/ending material. What other downturn in our history has seen such wholesale buying and propping of “private” enterprise? None, and thus we are setting sail on a path that has not be traveled before, one that already has changed our nation. The effects of which will be permanent, thus no exit plan required (LOL).

What Geithner describes here is NOT just a rolling over of funds, but if payback is received and given to the “general fund” (i.e. SPENT), and they continue to dole out the “headroom” amount up to the $700 billion cap, then that makes the $700 billion TARP A POTENTIALLY INFINITE SUM. That’s no roll-over he’s describing there Senator, wake the heck up!

May 27 (Bloomberg) -- The U.S. economy will enter “hyperinflation” approaching the levels in Zimbabwe because the Federal Reserve will be reluctant to raise interest rates, investor Marc Faber said.

Prices may increase at rates “close to” Zimbabwe’s gains, Faber said in an interview with Bloomberg Television in Hong Kong. Zimbabwe’s inflation rate reached 231 million percent in July, the last annual rate published by the statistics office.

“I am 100 percent sure that the U.S. will go into hyperinflation,” Faber said. “The problem with government debt growing so much is that when the time will come and the Fed should increase interest rates, they will be very reluctant to do so and so inflation will start to accelerate.”

Federal Reserve Bank of Philadelphia President Charles Plosser said on May 21 inflation may rise to 2.5 percent in 2011. That exceeds the central bank officials’ long-run preferred range of 1.7 percent to 2 percent and contrasts with the concerns of some officials and economists that the economic slump may provoke a broad decline in prices.

“There are some concerns of a risk from inflation from all the liquidity injected into the banking system but it’s not an immediate threat right now given all the excess capacity in the U.S. economy,” said David Cohen, head of Asian economic forecasting at Action Economics in Singapore. “I have a little more confidence that the Fed has an exit strategy for draining all the liquidity at the appropriate time.”

Action Economics is predicting inflation of minus 0.4 percent in the U.S. this year, with prices increasing by 1.8 percent and 2 percent in 2010 and 2011, respectively, Cohen said.

Near Zero

The U.S.’s main interest rate may need to stay near zero for several years given the recession’s depth and forecasts that unemployment will reach 9 percent or higher, Glenn Rudebusch, associate director of research at the Federal Reserve Bank of San Francisco, said yesterday.

Members of the rate-setting Federal Open Market Committee have held the federal funds rate, the overnight lending rate between banks, in a range of zero to 0.25 percent since December to revive lending and end the worst recession in 50 years.

The global economy won’t return to the “prosperity” of 2006 and 2007 even as it rebounds from a recession, Faber said.

Equities in the U.S. won’t fall to new lows, helped by increased money supply, he said. Still, global stocks are “rather overbought” and are “not cheap,” Faber added.

Faber still favors Asian stocks relative to U.S. government bonds and said Japanese equities may outperform many other markets over a five-year period. “Of all the regions in the world, Asia is still the most attractive by far,” he said.

Gloom, Doom

Faber, the publisher of the Gloom, Boom & Doom report, said on April 7 stocks could fall as much as 10 percent before resuming gains. The Standard & Poor’s 500 Index has since climbed 9 percent.

Faber, who said he’s adding to his gold investments, advised buying the precious metal at the start of its eight-year rally, when it traded for less than $300 an ounce. The metal topped $1,000 last year and traded at $949.85 an ounce at 12:50 p.m. Hong Kong time. He also told investors to bail out of U.S. stocks a week before the so-called Black Monday crash in 1987, according to his Web site.

To contact the reporter on this story: Chen Shiyin in Singapore at schen37@bloomberg.net; Bernard Lo in Hong Kong at blo2@bloombeg.net

I would love to see a serious analysis of recent velocity number and a comparison of them to other periods , , ,

Anway, here's this:

The Week /The Incredibly Uneven Recovery~~~~~~Rich Karlgaard, Forbes.com Digital Rules (5/26/09): Prior to thisrecession, the most notable feature of the late 20th/early 21st centuryeconomy was its volatility. The silicon chip, the Internet and globalismwere accelerants to the renaissance of entrepreneurial capitalism thatbegan in the late 1970s. Around the world, the storyline was familiar. Newproducts, services, distribution paths and business models would appearout of nowhere and cause damage to the old and slow.

The global consultant, McKinsey & Co., summarized this effect in a famous2005 paper called "Extreme Competition" (published in McKinsey Quarterly)."Extreme Competition" said top companies, across all industries, faced a20% to 30% probability of falling out of leadership in a five-year period.The chance of toppling from the top ranks had tripled in a generation.

Will this pace of disruption and churn continue during the recession andrecovery? I think so. It is tempting to see a recession as a yellowcaution flag that slows all cars in the field. But in fact, recessionstend to shake out the old, slow and bloated that masked their decline influsher times. The 1973-74, 1980 and 1982 recessions dealt death blows tothe incoherent conglomerates created during the 1960s. The 1990-91recession killed off the minicomputer industry and nearly did in IBM. Therecession of 2007-09 has shredded the Michigan auto industry. Big citydailies are falling everywhere. Were they killed by the recession orCraigslist? (By both.)

Recovery from this recession is likely to be weak. Rising oil pricesamidst increasing supply and falling demand is proof of U.S. dollarweakness and portends stagflation. Real growth for the American economywhen recovery starts will be in the 1% to 2% range, instead of the usual3%. It will be the 1970s again.

But remember: GDP growth is an aggregate number. Peel back this pedestriantop line figure, and what you'll see is a jagged landscape of booms andbusts. Some companies, industries, cities, regions and skill sets werenever hurt much and will experience a robust recovery. Others will bemired in permanent depression.

As one example, the New York Times columnist, Bob Herbert, points out thedisproportionate problems of uneducated young males: "The Center for LaborMarket Studies is at Northeastern University in Boston. A memo that Ireceived a few days ago from the center's director, Andrew Sum, notes that'no immediate recovery of jobs' is anticipated, even if the recessionofficially ends, as some have projected, by next fall

The memo said: 'Since unemployment cannot begin to fall until payrollgrowth hits about 1%--and payroll growth will not hit 1% until [grossdomestic product] growth hits at least 2.5% to 3%--we may not see anysubstantive payroll growth until late 2010 or 2011, and unemployment couldrise until that time.'

"We've already lost nearly 5.7 million jobs in this recession. Thoselosses, the center says, 'have been overwhelmingly concentrated among maleworkers, especially among men under 35.'"

As another example, today's Wall Street Journal has a fascinating tale oftwo Michigan cities, Ann Arbor and Warren: "The divide between Ann Arbor,with a population of 116,000, and Warren, population 126,000, is large andwidening. Ann Arbor's unemployment rate of 8.5% in March trailed thenationwide rate of 9% and was well below Michigan's overall rate of 13.4%,based on nonseasonally adjusted figures. By contrast, Warren'sunemployment rate of 17.3% is among the highest in the state. The averagefamily income in Ann Arbor was $106,599 in 2007, compared with $69,193nationally and $60,813 in Warren.

"That economic gulf wasn't always there. In 1979, the average family inWarren made $28,538 annually, not much below Ann Arbor's average of$29,840. But in the past 30 years, the U.S. economy has undergone asweeping transformation that has benefited cities like Ann Arbor and hurtmanufacturing hubs like Warren.

"Warren is suffering from its reliance on the auto industry.

"As transportation and communication costs fell, and countries like Japanand, now, China, increased their manufacturing capability, Michigan'sadvantages have faded. Those same forces of globalization benefitededucated workers--an area where Michigan largely fell short.

The science fiction writer, William Gibson, likes to say: "The future isalready here--it is just unevenly distributed."

Likewise, the economic recovery has already started. But its distributionwill be highly uneven.

It must be said, that like the breaking of a great dam, the American decent into Marxism is happening with breath taking speed, against the back drop of a passive, hapless sheeple, excuse me dear reader, I meant people.

True, the situation has been well prepared on and off for the past century, especially the past twenty years. The initial testing grounds was conducted upon our Holy Russia and a bloody test it was. But we Russians would not just roll over and give up our freedoms and our souls, no matter how much money Wall Street poured into the fists of the Marxists.

Those lessons were taken and used to properly prepare the American populace for the surrender of their freedoms and souls, to the whims of their elites and betters.

First, the population was dumbed down through a politicized and substandard education system based on pop culture, rather then the classics. Americans know more about their favorite TV dramas then the drama in DC that directly affects their lives. They care more for their "right" to choke down a McDonalds burger or a BurgerKing burger than for their constitutional rights. Then they turn around and lecture us about our rights and about our "democracy". Pride blind the foolish.

Then their faith in God was destroyed, until their churches, all tens of thousands of different "branches and denominations" were for the most part little more then Sunday circuses and their televangelists and top protestant mega preachers were more then happy to sell out their souls and flocks to be on the "winning" side of one pseudo Marxist politician or another. Their flocks may complain, but when explained that they would be on the "winning" side, their flocks were ever so quick to reject Christ in hopes for earthly power. Even our Holy Orthodox churches are scandalously liberalized in America.

The final collapse has come with the election of Barack Obama. His speed in the past three months has been truly impressive. His spending and money printing has been a record setting, not just in America's short history but in the world. If this keeps up for more then another year, and there is no sign that it will not, America at best will resemble the Wiemar Republic and at worst Zimbabwe. These past two weeks have been the most breath taking of all.

First came the announcement of a planned redesign of the American Byzantine tax system, by the very thieves who used it to bankroll their thefts, loses and swindles of hundreds of billions of dollars. These make our Russian oligarchs look little more then ordinary street thugs, in comparison. Yes, the Americans have beat our own thieves in the shear volumes. Should we congratulate them?

These men, of course, are not an elected panel but made up of appointees picked from the very financial oligarchs and their henchmen who are now gorging themselves on trillions of American dollars, in one bailout after another. They are also usurping the rights, duties and powers of the American congress (parliament). Again, congress has put up little more then a whimper to their masters.

Then came Barack Obama's command that GM's (General Motor) president step down from leadership of his company. That is correct, dear reader, in the land of "pure" free markets, the American president now has the power, the self given power, to fire CEOs and we can assume other employees of private companies, at will. Come hither, go dither, the centurion commands his minions.

So it should be no surprise, that the American president has followed this up with a "bold" move of declaring that he and another group of unelected, chosen stooges will now redesign the entire automotive industry and will even be the guarantee of automobile policies. I am sure that if given the chance, they would happily try and redesign it for the whole of the world, too. Prime Minister Putin, less then two months ago, warned Obama and UK's Blair, not to follow the path to Marxism, it only leads to disaster. Apparently, even though we suffered 70 years of this Western sponsored horror show, we know nothing, as foolish, drunken Russians, so let our "wise" Anglo-Saxon fools find out the folly of their own pride.

Again, the American public has taken this with barely a whimper...but a "freeman" whimper.

So, should it be any surprise to discover that the Democratically controlled Congress of America is working on passing a new regulation that would give the American Treasury department the power to set "fair" maximum salaries, evaluate performance and control how private companies give out pay raises and bonuses?

Senator Barney Franks, a social pervert basking in his homosexuality (of course, amongst the modern, enlightened American societal norm, as well as that of the general West, homosexuality is not only not a looked down upon life choice, but is often praised as a virtue) and his Marxist enlightenment, has led this effort. He stresses that this only affects companies that receive government monies, but it is retroactive and taken to a logical extreme, this would include any company or industry that has ever received a tax break or incentive.

The Russian owners of American companies and industries should look thoughtfully at this and the option of closing their facilities down and fleeing the land of the Red as fast as possible. In other words, divest while there is still value left. The proud American will go down into his slavery with out a fight, beating his chest and proclaiming to the world, how free he really is. The world will only snicker.

Michigan, through its Department of Environmental Quality (DEQ) is one of only two states in the union that regulates wetlands with a state agency rather than through the U.S. Army Corps of Engineers.

This has been a problem, because the state guidelines are much more strict than the federal guidelines. Additionally, the DEQ has proven to be arbitrary and capricious in its decision making and has often caused long, unnecessary delays in approving permits.

While the concerns about over-regulation by a state agency are valid, they may be rendered moot by recent efforts in Congress.

U.S. Sen. Russ Feingold has introduced a bill with 23 sponsors including Senators Carl Levin and Debbie Stabenow.

Senate Bill S787 is titled, “To amend the Federal Water Pollution Control Act to clarify the jurisdiction of the United States over waters of the United States.”

Notice they start the description with the words “pollution control.” That makes it sound caring and good, doesn’t it?

The fact is, this legislation will put ALL surface waters in the United States of America under congressional jurisdiction.

The bill language has a couple of key phrases in it. The first changes the definition of what is under congressional jurisdiction. Ever since the Commerce Clause of the Constitution and several test cases in the Supreme Court, Congress has had jurisdiction over navigable waters. The meaning of that word has been argued, but according to precedent and legal definition, navigable includes anything you can get a canoe down, or anything that is connected by water to the same.

No matter, because under S787, the word navigable is stricken, which means now ALL surface water is under congressional jurisdiction.

Additionally, in case there were any question of state’s rights, the bill also states that this applies to interstate and intrastate waters. That means there is no state sovereignty over waters within that state’s boundaries.

And, if you have any doubt as to what the congressional definition of “waters” is, they spell that out, too. It includes, “all waters subject to the ebb and flow of the tide, the territorial seas, and all interstate and intrastate waters and their tributaries, including lakes, rivers, streams (including intermittent streams), mudflats, sandflats, wetlands, sloughs, prairie potholes, wet meadows, playa lakes, natural ponds, and all impoundments of the foregoing, to the fullest extent that these waters, or activities affecting these waters, are subject to the legislative power of Congress under the Constitution.”

The bottom line is this: Congress is taking over all the water.

If the Obama administration and Congress are anything like this state’s governor and her administration, you will see free trade and commerce come to a virtual standstill. Manufacturing, especially, will come to a screeching halt.

Water is an essential resource in the manufacture of virtually any consumable or durable good. Without ready access, manufacturers will be stifled in their attempts to create new products for market and the jobs that go with them.

Jack Hoogendyk is a former state legislator and executive director of CIVPRO, a nonprofit property rights organization based in Michigan

Now mind you Michigans DEQ water quality standards are much stricter than the EPA . So this isn't about pollution this is about controll over the states and manufacturing.Also this will then enable the feds to start draining the great lakes and pumping the water else where which every Michigander is opposed to except the sellout obamites levin and stabenow.

With each passing week that the assault against global capitalism continues in Washington, I become more nostalgic for one missing voice: Milton Friedman's. No one could slice and dice the sophistry of government market interventions better than Milton, who died at the age of 94 in 2006. Imagine what the great economist would have to say about the U.S. Treasury owning and operating several car brands or managing the health-care industry. "Why not?" I can almost hear him ask cheerfully. "After all, they've done such a wonderful job delivering the mail."

I would rank Milton Friedman, next to Ronald Reagan, as the greatest apostle for freedom and free markets in the second half of the 20th century. I used to find great joy in visiting him and his wife and co-author, Rose, at their home in San Francisco. We'd have dinner at their favorite Chinese restaurant and chat about the latest silliness out of Washington.

I've been thinking a lot lately of one of my last conversations with Milton, who warned that "even though socialism is a discredited economic model and capitalism is raising living standards to new heights, the left intellectuals continue to push for bigger government everywhere I look." He predicted that people would be seduced by collectivist ideas again.

He was right. In the midst of this global depression, rotten ideas like trillion-dollar stimulus plans, nationalization of banks and confiscatory taxes on America's wealth producers are all the rage. Meanwhile, it is Milton Friedman and his principles of free trade, low tax rates and deregulation that are standing trial as the murderers of global prosperity.

When the University of Chicago wanted to create a $200 million Milton Friedman Institute last year, Sen. Bernie Sanders of Vermont, an avowed socialist and Chicago alum, fumed that "Friedman's ideology caused enormous damage to the American middle class and to working families here and around the world."

At academic conferences it has been open season on Friedman and his philosophy of limited government. Joseph Stiglitz, a Nobel Prize winner, says that Friedman's "Chicago School bears the blame for providing a seeming intellectual foundation" for the now presumably discredited "idea that markets are self-adjusting and the best role for government is to do nothing." University of Texas economist James Galbraith is even more dismissive: "The inability of Friedman's successors to say anything useful about what's happening in financial markets today means their influence is finished," he says. And pop author Naomi Klein says triumphantly: "What we are seeing with the crash on Wall Street . . . should be for Friedmanism what the fall of the Berlin Wall was for authoritarian communism: an indictment of ideology." One left-wing group is even distributing posters in Washington and other cities that proclaim: "Milton Friedman: Proud Father of Global Misery."

The myth that the stock-market collapse was due to a failure of Friedman's principles could hardly be more easily refuted. No one was more critical of the Bush spending and debt binge than Friedman. The massive run up in money and easy credit that facilitated the housing and credit bubbles was precisely the foolishness that Friedman spent a lifetime warning against.

A few scholars are now properly celebrating the Friedman legacy. Andrei Shleifer, a Harvard economics professor, has just published a tribute to Friedman in the Journal of Economic Literature. He describes the period 1980-2005 as "The Age of Milton Friedman," an era that "witnessed remarkable progress of mankind. As the world embraced free market policies, living standards rose sharply while life expectancy, educational attainment, and democracy improved and absolute poverty declined."

So the Bernie Sanders crowd has things exactly backward: Milton's ideas on capitalism and freedom did more to liberate humankind from poverty than the New Deal, Great Society and Obama economic stimulus plans stacked on top of each other.

At one of our dinners, Milton recalled traveling to an Asian country in the 1960s and visiting a worksite where a new canal was being built. He was shocked to see that, instead of modern tractors and earth movers, the workers had shovels. He asked why there were so few machines. The government bureaucrat explained: "You don't understand. This is a jobs program." To which Milton replied: "Oh, I thought you were trying to build a canal. If it's jobs you want, then you should give these workers spoons, not shovels."

But in the energy industry today we are trading in shovels for spoons. The Obama administration wants to power our society by spending three or four times more money to generate electricity using solar and wind power than it would cost to use coal or natural gas. The president says that this initiative will create "green jobs."

Milton knew how to create real wealth-producing jobs. Once, when he visited India in the early 1960s, John Kenneth Galbraith, the U.S. ambassador, welcomed him by only half-joking, "I can think of no place where your free-market ideas can do less harm than in India." Talk about irony. India has adopted much of the Friedman free-market model and has moved nearly 200 million people out of destitution and despair.

I recently phoned Rose Friedman and asked her what she thought about the attacks on her husband. She was mostly dismayed at how far off-course our country has veered under President Obama. "Is this the death of Milton's ideas?" I hesitantly asked. "Oh no," she replied, "But it is the death of common sense."

I think this year has been the straw that broke the camels back for my familys manufacturing firm. We moved our office off shore and have sent over 1 million dollars worth of quotes to india, China and the Republic of Georgia this month alone. I almost felt guilt when i found out that the work we pulled will probably cause a smallish machine shop to go under.......... If it doesnt have to be made in Canada or the U.S it will go off shore. Im tierd of unions, taxes and people with an entitlement mentality. Going forward im going to take care of me and mine, let it burn. After what Obama did to the bond holders of GM and Chrysler, hard working men in their 50's and 60's have litterally watched thier retirments be disolved and taken by the govt for themselves and the "worker".................. what the hell.

Geopolitical Diary: The Significance of GM's BankruptcyJune 2, 2009U.S. auto giant General Motors filed for Chapter 11 bankruptcy on Monday, ending a period of U.S. dominance in automotive manufacturing that began when the first Ford Model T rolled off the assembly line in Detroit. In the United States and around the world, GM’s collapse is being viewed as yet another harbinger of doom — at least the third horseman of the apocalypse (right behind the collapse of Lehman Bros. and mounting government deficits) foretelling the end of U.S. hegemony — and as “proof” that American manufacturing capacity and industrial prowess is rotten to the core.

The collapse of GM is certainly not to be taken lightly, and its political, social and economic ramifications are serious. The U.S. “Rust Belt” has been rusting since essentially the late 1960s, and the collapse of what was once a manufacturing powerhouse certainly will erode it further. Some 21,000 employees (around 34 percent of GM’s total work force) are looking at layoffs. The 780,000-plus workers in the automotive parts industry are facing uncertainty, as their industry will be affected by the collapse. Then there are the serious effects that the end of GM will have for businesses that are not related to, but nevertheless dependent on, the automotive sector. According to estimates from the auto parts industry, 4.7 jobs — in everything from catering to regional banks — are created for every one job in the motor vehicle parts industry.

This is undoubtedly a social and economic concern. From a geopolitical perspective, however, it is far from upsetting the main foundations of U.S. hegemony.

First, American industrial prowess remains unrivaled in the world. In 2006, U.S. industrial production equaled $2.8 trillion — the largest in the world, more than double that of second-place power Japan, and more than the production of Japan and China combined. The collapse of GM, the symbol of American manufacturing might, will not put a dent in this industrial output.

In terms of value added from the United States’ entire industrial output, the automotive sector (counting both the suppliers and automotive manufacturers) accounted for only 5.54 percent. Motor vehicles alone accounted for just 2.49 percent, with the rest roughly representing auto-parts manufacturers’ shares. Computer and electronic products, by contrast, accounted for 7.64 percent, non-transport machinery (such as capital goods) accounted for 5.01 percent and aerospace accounted for 3.26 percent. In fact, if computers and electronics are combined with other “high-tech” manufacturing categories (such as communication equipment; aerospace; semiconductor and other electronic components; navigational, measuring, electromedical, and control instruments; and other electrical equipment), they account for more than 20 percent of total U.S. industrial output.

Nevertheless, automotive manufacturing does account for the majority of manufacturing jobs — 4.5 million of them nationwide. And according to the Center for Automotive Research, automotive manufacturing provides more jobs than any other sector in seven states (Indiana, Kentucky, Michigan, Missouri, Ohio, South Carolina and Tennessee). However, manufacturing as a whole has played a declining role in U.S. employment, despite a steady and regular rise of the industrial production index, which calculates real industrial output. The reason for this is the rise in labor-saving technological advances. For the U.S. industrial sector, this means that between 1979 and 2009, industrial output roughly doubled, but the labor force engaged in manufacturing dropped from 21 percent in 1979 to just over 9 percent in 2009. Basically, the U.S. industrial laborer has become four times more efficient than his or her counterpart in the 1980s.

The fact is that U.S. industrial output has been increasing along with the productivity of the American worker. The switch to more specialized and high-tech manufacturing jobs has facilitated that shift, and the collapse of the automotive manufacturing sector simply represents the culling of the least-efficient sector of American manufacturing. Highlighting that shift, GM was replaced in the Dow Jones Industrial Average — a key index for the U.S. industrial sector — by Cisco Systems, a manufacturer and designer of complex networking and communications technology.

The culling of jobs in the automotive sector will be extremely difficult. It will present a social, demographic and economic challenge that could define the next decade of American politics. However, from a geopolitical perspective, the United States is losing manufacturing capacity in a technology that has been mastered by almost every current, rising and future global player.

Whereas automotive manufacturing once signaled one’s “arrival” on the geopolitical scene — which in part explains a plethora of car manufacturers from Serbia to Colombia — it no longer represents a monumental technological achievement. Future economic competition will be based on the ability to master computer, communication, robotic, space travel, and nuclear technology (with potentially other, unforeseen technologies becoming part of the mix as well).

In other words, the United States is moving onto bigger challenges, fulfilling its role as a global hegemon, but incurring the political growing pains that go along with such a shift.

May Employment Report Not BelievableFriday, June 5, 2009, 8:51 am, by cmartensonWell, I thought that I had seen some fantastic data manipulation in the past, but today's release of the May employment report by the BLS was a real keeper. It is one for the books (the forensic accounting books, specifically).

Here's the news:

NEW YORK (CNNMoney.com) -- Job losses slowed dramatically in May, according to the latest government reading on the battered labor market, even as the unemployment rate rose to a 26-year high.

Employers cut 345,000 jobs from their payrolls in the month, down from the revised 504,000-job decline in April.

What spectacular news! Stock futures vaulted, gold killed, the dollar rebounded - all in all a very favorable set of market outcomes that are certainly welcome in the marbled halls of DC and on Wall Street.

The problem is that this huge surprise to the upside is completely out of line with other sources of data and depends (once again) on an incredibly suspect boost from the Birth-Death Model. Let's start there.

In the chart below, you are looking at the number of jobs that the BLS has "modeled" to have been created. These are either added to or subtracted from the total that is reported and trumpeted across the financial-media spin machine.

I want you to note the blue arrows, which reveal that 43,000 construction jobs were somehow added in the month of May, along with 77,000 "leisure & hospitality" (hotels and parks and such) jobs and even 7,000 financial services jobs (I bet there are more than a few banking industry folks wondering where those might be!).

I shared your post with economist Scott Grannis HUSS and here are his comments:

The establishment survey data is always subject to the whims of seasonal adjustment and fudge factors (birth-death model). That's why I always look at the household survey, which has no fudge factors. Sometimes the two diverge. This time they are both telling the same story: job losses are slowing down. Coupled with the unemployment claims and all the green shoots out there, I think it is clear that the recession has ended.

But, to use the jargon of Wall Street, even if the number “beats estimates,” let’s not get too excited.

It’s probably recession/bailout fatigue, but I’ve run out of patience for the economic spin doctors from both extremes - the doom and gloomers as well as the sunny optimists.

Already this week, I’ve heard chief investment officers and economists calling for a “four- or five-handle” on the employment report. That’s financial news show-speak for a monthly loss of jobs of 400,000 to 500,000.

Such a report would be promising, the optimists say, because it shows the job market is getting “less bad.” After all, the worst month for job loss stands as January, when U.S. employers shed 741,000 workers.

But when the job market has turned from a comfy warm tub to a scalding cauldron of acid, wonky discussions about the temperature seem to miss the point:

It’s a lousy job market, and it’s going to stay bad for some time to come.

Yes, 500,000 is a smaller figure than 700,000. Forgive me if I save the champagne for the month when employers are creating jobs again.

Since the start of the recession in December 2007, the United States has lost 5.7 million jobs. Pick any survey of forecasters you want and none predicts job creation beginning before 2010. Think deep into 2010.

For the 132 million of us counted in non-farm payroll statistics, that’s worrisome. For the 13.7 million unemployed identified in the Bureau of Labor Statistics’ household survey, that’s downright depressing.

The economists at IHS Global Insight are among the more optimistic. They project a decline in payroll employment of 450,000 in May. “In normal circumstances a decline of 450,000 jobs would be seen as very bad news,” IHS said in a recent note.

Their point is these are not normal times, so coming after the loss of 539,000 jobs in April, 699,000 jobs in March and 681,000 in February, IHS views a four-handle as “clear improvement.”

What’s clear to me is that we have a lot of pain to endure before we harvest Federal Reserve Chairman Ben Bernanke’s “green shoots.”

Yesterday, after a painfully long death spiral, General Motors finally filed for Chapter 11 bankruptcy protection. Oftentimes, bankruptcy portends rebirth. Unfortunately, the politically-inspired GM plan holds no such possibilities. Under the current deal, the restructuring of GM will cost taxpayers some $100 billion (after the hidden costs of interest and refinancing are included). Even then, it is highly unlikely that GM will ever be competitive or that its debts will ever be repaid. Far worse, the massive government bailout will delay rather than encourage broader economic recovery. And yet, U.S. stock markets rose on the GM announcement as if it were good news.

General Motors is but a microcosm of what most ails the U.S. economy. For decades, GM rested on its laurels. Its management yielded to innumerable, exorbitant trade union demands, passing the costs on to consumers in the form of lower quality products. The result was that higher quality foreign cars, eventually also produced domestically by American workers, severely eroded GM’s once dominant market position. The company’s autonomy was effectively extinguished by the growing debt needed to finance this downward spiral. Investors, believing that GM was “too big to fail,” continued to accept the company’s high-risk paper.

In short, GM was brought to its knees by the abuse of trade union power and management’s unwillingness to fight back.

Contrary to general belief, GM is not a huge employer. It directly employs only some 60,000 workers. This is less than one tenth of one percent of the number of Americans presently unemployed. However, its trade union pension fund is being given billions of dollars of citizens’ money and a major stake in the restructured company. Favoring GM workers over the millions of America’s unemployed is grossly inequitable. The reason, however, is found in the murky world of politics.

The United Auto Workers (UAW), GM’s primary union, was a major supporter of President Obama’s election campaign. Predictably, this Administration has moved aggressively to subsidize them. Obama has taken the position that GM workers are an ‘elite’ and entitled to privileges not afforded to other workers. If GM were any other company entering bankruptcy, many workers would have lost their jobs, pensions and health coverage. Not so under the protective blanket of Daddy Government.

In its fight for grotesque entitlements for this small, but heavily Democratic, subset of the workforce, the Administration has run roughshod over those who financed the American auto industry, even labeling some as “unpatriotic” for failing to surrender their contract rights as bondholders. The notion that these stakeholders should “cooperate” to reach an “equitable” solution ignores the free-market cooperation that led to the original, contractual agreements. If I agree to give you half of my steak in return for half of your mashed potatoes when I finish my entrée, and when I go to collect you have eaten 9/10 of your mashed potatoes, can you plead poverty? You ate the potatoes!

Aside from these considerations, the sheer logic of the deal is faulty. Has Obama ever heard of opportunity costs?

Having pursued a path to commercial failure for many decades, it is clear that GM’s management and workforce are moribund. However, the government has decided to pump massive amounts of citizens’ money into this flaccid firm, without the practical ability to change its operations. Remember, the unions put Mr. Obama in office, and this project is meant to reward them. Will he have the courage to do what a profit-seeking management couldn’t, by cutting the fat from this company? Obama now claims that a new “private sector” management team will be installed to make decisions independent of political control. This is farcical.

Economists believe that for each $1 billion spent on infrastructure projects, 35,000 wealth-generating jobs are created in the broader economy. The Administration is set on spending a minimum of $60 billion, and more likely $100 billion, to protect 60,000 workers at GM. Spent on much needed infrastructure, these same monies would create between 2.1 and 3.5 million real private sector jobs.

Furthermore, the money spent on GM represents a direct penalty against those foreign auto companies that manufacture domestically, who are fighting desperately for a piece of a decreasing market. American workers at these plants must surely feel unfairly discriminated against. Perhaps these competitors’ ownership is overseas; but, while GM was shipping its manufacturing to Canada and Mexico, these firms were expanding their operations right here in America.

The federal bailout of GM exemplifies the grossly negative impact that government intervention has on the economy. As this type of behavior becomes ever more accepted and popular (barring a major change in voter sentiment), the prospects for the U.S. dollar and American stock markets is grim. Yet, American investors are bullish on the bad news. They are reading corrupt bankruptcy proceedings and profligate spending as a sign of effective governance. This highlights how desperately most investors, indeed most Americans, are clinging to the red herrings of “hope” and “change.”

As goes GM, so goes the country.

For a more in depth analysis of our financial problems and the inherent dangers they pose for the U.S. economy and U.S. dollar denominated investments, read Peter Schiff’s latest book "The Little Book of Bull Moves in Bear Markets".

This week, Team Obama took their dog and pony show on the road. Treasury Secretary Geithner went to China, Fed Chairman Bernanke to Capitol Hill, and the President himself began a Mideast tour in Saudi Arabia. This full-court press is not coincidental, and comes just as the federal government has begun unloading trillions of dollars in new Treasury obligations. The coordinated charm offensive is meant to assure the world-at-large that the United States can repay these obligations without destroying the dollar.

Given the renewed weakness in the dollar and the recent expressions of concern from China, our largest creditor, about the safety of its current holdings, this is no easy sell. Not only must our leaders convince holders of our debt not to sell what they already own, but to back up the truck and buy a whole lot more. The hope is that a dream team consisting of a charismatic politician, a skilled Wall Street banker with longstanding ties to China, and a respected Fed Chairman, can close the deal. However, no matter how slick the sales pitch, no amount of lipstick can dress up this pig.

The most obvious fear the trio must address is that oversized deficits will persist indefinitely. Reading from a carefully scripted rebuttal book, all three proclaim that as soon as the stimulus revives our economy, the government will take all necessary steps to reign in the deficits that result. Bernanke’s testimony showcases this rhetorical shift. The Fed Chairman claimed that catastrophe has been averted and that the recession is nearly over. As a result, he advised Congress to now focus on debt management. How he expects them to do that was left unexamined.

Setting aside the fact that the recession is far from over and that the stimulus will actually weaken the economy in the long run, Bernanke’s words were less a practical guide to Congress than a bromide for our foreign creditors. Meanwhile, Obama carefully peppers his speeches with calls for Americans to live within their means, to save more and spend less, to produce more and consume less. But nothing in the government’s current fiscal or monetary policy will encourage such behavior. In fact, the objective of economic stimulus is to prevent such changes from taking place!

The laughter of Chinese students that greeted Secretary Geithner at Peking University shows how ridiculous this spiel sounds overseas. Actions speak louder than words, and the actions of the current Administration are deafening. Multi-trillion dollar deficits, bailouts, nationalizations, quantitative easing, and grandiose plans for government-provided healthcare, education, and alternative energy, render all their claims of future prudence meaningless. If our leaders will not make tough choices now, why should anyone believe they will do so later when those choices will be even harder to make?

Of course, it’s not just major holders, like China and Saudi Arabia, that need to be convinced. Since the largest holders are already in so deep, they have the greatest short-term incentive to play ball. While throwing good money after bad is certainly a lousy investment strategy, it is politically expedient as it delays the need to officially acknowledge losses. The spin is designed to keep all the smaller, more nimble holders from dumping their Treasuries. The major holders can publicly pledge their commitment to Treasuries, while they privately planning their exit strategies, as long as they feel that the smaller holders won’t spook the market by front-running their trades.

However, once the psychology turns, there is no way to stop the rush for the exits. Remember how quickly the secondary market for subprime mortgages collapsed? One day, investors were lining up to buy; the next day, the stuff couldn’t be given away. Make no mistake about it, we are issuing subprime paper and no amount of political spin can alter that reality. Bogus credit ratings aside, I think the world already knows this and it’s just a matter of time before someone admits it.

In the meantime, by continuing to lend, our creditors merely supply us the shovels to dig ourselves into an even deeper economic hole. Their credit enables our government to grow when it needs to shrink, finances bailouts of companies that should be allowed to fail, and enables a nation that should be saving and producing to continue borrowing and spending. As a result, the more money the world loans us, the less capable we are of paying it back. I really wish the world would stop doing us favors, as neither party can afford the consequences.

For an timely example, just look at California. With an unmanageable $20 billion deficit, California recently asked Washington for a bailout. With none immediately forthcoming, California was forced to make real and needed budget cuts. The hard choices, which will benefit California in the long run, would not have been made if federal funds had been committed. We all should be so lucky.

For a more in depth analysis of our financial problems and the inherent dangers they pose for the U.S. economy and U.S. dollar denominated investments, read Peter Schiff’s book "Crash Proof: How to Profit from the Coming Economic Collapse".

Huge sums of Treasury bonds seized on italian-swiss border A short summary in english, i found the news in italian only.

On june, 4th the Italian police officials of the "Guardia di Finanza" and swiss authorities stopped two japanese businessmen arriving in Switzerland from the italian border at Chiasso; at the customs check the two declared nothing and were discovered having hidden in their luggage 249 FED Bonds ($500 millions each) and 10 "Kennedy" bonds ($1 billion each) for a total of $134 billion in value.

BRIC Countries Kick Sand in the Face of 98-pound-weakling US Dollar Well, there they go again, as Ronald Reagan used to say. The Russians, that is, sniping at our powerful, globally-respected currency. Get a load of this commie carping --

June 5 (Bloomberg) -- Russian President Dmitry Medvedev questioned the U.S. dollar’s future as a global reserve currency and said using a mix of regional currencies would make the world economy more stable. The dollar “is not in a spectacular position, let’s be frank, and its prospects cause various questions as do the prospects for the global currency system,’’ Medvedev, who today hosts an international economic forum in St. Petersburg, said in an interview published by the Moscow-based Kommersant newspaper.

A new world currency may be on the agenda when Medvedev meets counterparts from Brazil, India and China on June 16 at a summit in the Ural Mountains city of Yekaterinburg, the Kremlin said this month. “This idea has potential, even though some of my G-20 colleagues aren’t actively discussing it at the moment,’’ Medvedev told Kommersant. “However, for example, in the opinion of our Chinese colleagues it is quite a possible step. The most important thing is not to walk away from discussions on this topic.’’

Turning the ruble into a reserve currency is still a possibility, especially if some of Russia’s partners start making payments for their oil and gas in rubles, Medvedev said. Russia might consider setting up ruble-yuan swap positions similar to the recent accord suggested between China and Brazil, he said.

Here is a comment made on the article above that sums it up quite well

Quote

At 2.85 billion, the population of the BRIC countries is more than nine times higher than that of the U.S. Their combined GDP is slightly larger, too.

Currently, the English-speaking financial centers of New York and London have carved out a role for themselves as global cross-rate middlemen. If you want to exchange rubles for yuan, typically you must do back-to-back transactions -- rubles to dollars, then dollars to yuan. Forex dealers love the fat spreads and dual commissions.

If the BRIC countries decide to walk away from this exploitative, anachronistic scam, there won't be a damned thing that the Anglosphere can do about it.

More significant than the eroding economic leadership of the U.S. is its eroding intellectual leadership. Bretton Woods I, circa 1944, was an Anglo-American production. Bretton Woods II, circa 1971-1973, was an abortion caused by U.S. default on its promise to redeem overseas dollars for gold.

Now, virtually all innovative thinking on global monetary reform comes from the BRIC countries, while Anglo-Americans stand by sucking their thumbs, navel-gazing, and tweaking their high-speed presses. Does the unmerited privilege of seignorage make you poor and stupid? The evidence points that way, comrades.

I suppose we can argue lower taxes, raise taxes, or... but I think most of us agree, the increased debt is frightening. The day of reckoning will arrive; the question is only when.Sorry, it's long, but it makes some salient points.

The next great crisis: America's debtAt this rate, your share of the load will be $155,000 in a decade. How chronic deficits are putting the country on a path to fiscal collapse.

(Fortune Magazine) -- Normally Paul Krugman, the liberal pundit and Nobel laureate in economics, and Paul Ryan, a conservative Republican congressman from Wisconsin, share little in common except their first names and a scorching passion for views they champion from opposite political poles. So when the two combatants agree on a fundamental threat to the U.S. economy, Americans should heed this alarm as the real thing. What's worrying both Krugman and Ryan is the rapid increase in the federal debt - not so much the stimulus-driven rise to mountainous levels in the next few years, but the huge structural deficits that, under all projections, keep building the burden far into the future to unsustainable, ruinous heights. "The long-term outlook remains worrying," warned Krugman in his New York Times column. Krugman strongly supports President Obama's spending plans but bemoans the shortfall in taxes to pay for them.

Ryan flays the administration for piling new spending on top of already enormous deficits. "This isn't a temporary stimulus but a ramp-up in debt followed by a greater explosion in spending and debt," he told Fortune, predicting a day when America's creditors will start viewing the U.S. Treasury as a risky bet. "The bond markets will come after us with a vengeance. We're playing with fire." Krugman favors far higher taxes, while Ryan wants to curb spending, but for now what's so big and so dangerous that it distresses such diverse types as Krugman and Ryan - and should scare all Americans - is the Great Debt Threat.

The bill is far too big for only the rich to pick up. There aren't enough of them. America will have to lean on citizens far below the $250,000 income threshold: nurses, electricians, secretaries, and factory workers. Within a decade the average household that pays income tax will owe the equivalent of $155,000 in federal debt, about $90,000 more than last year. What the Obama administration isn't telling Americans is that the only practical solution is a giant tax increase aimed squarely at the middle class. The alternative, big cuts in spending, aren't part of the President's agenda. To keep the debt from wrecking the economy, the U.S. would need to raise annual federal income taxes an average of $11,000 in 2019 for all families that pay them, an increase of about 55%. "The revenues needed are far too big to raise from high earners," says Alan Auerbach, an economist at the University of California at Berkeley. "The government will have to go where the money is, to the middle class." The most likely levy: a European-style value-added tax (VAT) that would substantially raise the price of everything from autos to restaurant meals.

The growing debt will burden Americans not just with heavier taxes but also with higher interest rates and slower economic growth. On June 3, Fed chairman Ben Bernanke warned Congress that heavy borrowing is one of the factors driving up rates. The trend is just beginning, according to Allan Meltzer, the distinguished monetarist at Carnegie Mellon. "Rates can only stay low if foreign investors keep buying our debt," he warns. "I predict far higher rates over the next few years." The risk that the U.S. will follow Britain, which was warned recently that it could lose its triple-A bond rating, has risen from virtually nil to a real possibility, judging by the sevenfold jump in the cost of insuring Treasury debt in the past year. The big borrowing is already spooking the bond markets. This year rates on 10-year Treasuries have jumped from 2.2% to 3.7%. A further increase in rates would aggravate the situation, raising the interest costs on the debt and increasing its size even more.

As Krugman and Ryan point out, the problem isn't so much the big budget gaps for this year and next, though their scale is shocking. It's the policies that will allow the trend to become far worse in the future. After the stimulus spending winds down and the economy recovers, our spending will still far exceed our revenues. In 2009 the U.S. will post a deficit of $1.8 trillion, or 13.1% of GDP, according to the nonpartisan Congressional Budget Office, twice the post-World War II record of 6% in 1983 under Ronald Reagan. Now let's look forward to 2019, the final year for the budget projections for the administration and the CBO. Even in a scenario that assumes healthy economic growth, the CBO puts the 2019 deficit at $1.2 trillion, or 5.7% of GDP. "That wouldn't be a huge number for an economic downturn, but it's extremely high in a full-employment period," says William Gale, an economist at the centrist Brookings Institution. It gets worse from there. Around 2020 the cost of the big entitlements, Social Security and Medicare, soar as the peak wave of baby boomers retire.

It can't go on forever, and it won't. What will shock America into action is the prospect of fiscal collapse, which will grow more vivid each year. In 2008 federal borrowing accounted for 41% of GDP, about the postwar average. By 2019 the burden will double to 82% by the CBO's reckoning, reaching $17.3 trillion, nearly triple last year's level. By that point $1 of every six the U.S. spends will go to interest, compared with one in 12 last year. The U.S. trajectory points to the area that medieval maps labeled "Here Lie Dragons." After 2019 the debt rises with no ceiling in sight, according to all major forecasts, driven by the growth of interest and entitlements. The Government Accountability Office estimates that if current policies continue, interest will absorb 30% of all revenues by 2040 and entitlements will consume the rest, leaving nothing for defense, education, or veterans' benefits.

To understand why a massive tax increase, probably a VAT, is the mostly likely outcome, it's crucial to look at what's driving the long-term, widening gap between revenues and spending. Put simply, spending is following a steep upward curve, while revenues are basically fixed as a portion of GDP. Why? Because future spending is driven mostly by entitlements, which are programmed to rise far faster than national income, while revenues depend heavily on the personal income tax, which yields receipts that typically rise or fall with GDP. Under George W. Bush, the U.S. experienced a prelude to the crisis before us: Spending rose rapidly, while revenues remained reasonably flat. Bush created an expensive new entitlement, the Medicare drug benefit (cost this year: $63 billion), and let spending on domestic programs from education to veterans' benefits run wild. Over seven years the wars in Afghanistan and Iraq added a total of some $900 billion to the budget. All told, Bush raised spending from 18.5% to 21% of GDP, setting in motion a chronic budget gap by piling on new spending without paying for it.

Under Obama the Bush trend keeps going, but this time on steroids. It's important to see the Obama budget projections as two phases, the crisis period of astronomical spending in 2009 and 2010, and the normal phase, from 2011 to 2019. Most of his stimulus and other big programs are designed to give the economy a jolt in 2009 and 2010 and then largely disappear or be offset by tax increases - at least that's the plan. Then the surge in outlays comes from two forces that would wreak budget havoc for any President: the relentless rise in entitlements and the surge in debt interest.

Making the challenge far greater: Obama's budget is packed with a wish list of expensive new programs, led by a giant health-care-reform plan. He promises to pay for them mainly with higher taxes. But if extra revenues don't materialize - and most that he's proposed now look unlikely - will he abandon many of his cherished priorities or push them through without full funding, substantially deepening the debt crisis? The answer could determine how fast America reaches the hour of reckoning that could usher in a VAT.

Let's divide Obama's budget projections into the plausible, the impossible, and the questionable. First, the plausible: It's optimistic but highly possible that spending on Fannie Mae, Freddie Mac, and the Troubled Assets Relief Program (TARP) will fall from more than $500 billion this year to around $20 billion in 2010, and keep declining from there. It's also plausible that the costs of the wars in Afghanistan and Iraq will fall to around $50 billion a year.

Now the practically impossible: Obama is using a timeworn gimmick by pledging that nonmilitary discretionary spending, outlays that require annual approval, will rise just 2.1% a year from 2012 to 2019. It won't happen. Obama is raising spending in this category, which includes education, health research, and homeland security, a generous 9% in 2009 and 10% in 2010, excluding the stimulus outlays. "It's far more likely the category will match its historical growth rate of around 6.5% a year," says Brian Riedl, an economist with the conservative Heritage Foundation. The GAO says it will rise with GDP, at well over 5%.

Let's examine one of the questionables. Obama's prize initiative - and by far his biggest - is his health-care plan. In his 2010 budget request the President proposes a $635 billion "down payment" or "reserve fund" toward universal health coverage over ten years. As the administration acknowledges, the $635 billion doesn't come close to covering the full expense of the program. Leonard Burman, chief of the nonpartisan Tax Policy Center, estimates the total cost at $1.5 trillion. Obama plans to offset the down payment from two sources: from limiting deductions for high earners - still another hit to the over-$250,000 crowd - and from squeezing the balance from Medicare through curbing unnecessary hospital stays and ending a plan offering HMO services. Once again, Obama will most likely lose a big part of the revenue he counted on. The limitation on deductions is encountering what looks like fatal opposition in Congress. Obama and his budget director, Peter Orszag, swear that the health-care plan will not worsen the deficit. "We are committed to making sure that health-care reform is deficit neutral," Orszag told Fortune.

The administration's attachment to reform goes far beyond the campaign to provide universal care. Orszag adds, correctly, that unbridled health-care costs, chiefly for Medicare, "are the most important driver of our long-term entitlement problem." Obama is also counting on massive investment in infrastructure to reduce medical costs by spreading electronic record keeping, promoting prevention and wellness, and conducting research to determine the most effective therapies. It's impossible to predict how much money those initiatives would actually save. The administration isn't making a forecast.

Although a VAT seems inevitable, the administration isn't ready to get behind it. "While we are open to ideas to finance health-care reform in a deficit-neutral way," says Orszag, "the VAT is an idea popular with academics, but not one seriously considered by policymakers." The problem, however, is that the income tax simply won't do the job. Closing the budget deficit in 2019 by taxing only people earning more than $250,000 would require lifting their federal marginal tax rates to around 60%. The budget already calls for them to pay, on average, $30,000 more a year than in 2008, with the biggest hit falling on households with income above $500,000. Raising income taxes on all the Americans who pay them wouldn't work either. It would require a 55% increase per household, a political impossibility. The one other major new revenue raiser on the table is a tax on employer-provided health care, but that would merely help pay for a new program to cover the uninsured, rather than closing the deficit.

A VAT, on the other hand, would tax such a giant pool of purchases that a relatively low rate of 10% to 15% could generate the revenues needed to pay for Obama's agenda and balance the budget. The VAT, which would be imposed like a federal sales tax, is paid along the chain of production by wholesalers and retailers. The cost is passed to consumers in the form of higher prices. For the Democrats, the problem with the VAT is that it falls heavily on the middle class and low earners, who use a far higher portion of their incomes to buy things than the rich do. Some of the sting can be removed by exempting food and clothing from the VAT or sending rebates to lower-income households. But the middle class would be a big target in any event. "A lot more people will pay," says Gale. "We cannot get there from here without a VAT."

That brings us back to Krugman and Ryan. Wonder of wonders, they agree again - this time that a VAT is coming. Krugman likes the idea, though he says the middle class will pay more. "There's probably a value-added tax in our future," he writes. Ryan despises the VAT as the beginning of the end of the American empire. "The VAT is definitely the trajectory Obama is putting us on," he laments. Ryan believes that the big growth in government in Europe came from the easy money it provided. He makes a good point. It's not a destiny to be desired. And when the two Pauls agree, you can bet it's where things are headed.

Opinion: Zero growth at Pentagon leaves $150B budget gapBrookings Institution fellow Michael O'Hanlon says President Barack Obama has made his first serious mistake in the national security realm by failing to present an adequate five-year defense budget. O'Hanlon says a policy of zero growth in inflation-adjusted Pentagon spending will leave the U.S. about $150 billion short of its defense needs by the year 2014. While praising budget increases for international aid and State Department programs, O'Hanlon says it is "unwise politics and unwise strategy to put these key elements of foreign policy in direct competition with each other, as appears to be the case in the new budget." The Washington Post

KUALA LUMPUR (Reuters) - GE Aviation, a unit of General Electric Co (GE.N) and the world's largest maker of jet engines, expects orders this year to halve as airlines slow plane buying amid a slump in travel demand.

Jack Lutze, vice-president of sales for Europe and Africa, told Reuters on Tuesday some deferrals were likely for next year's deliveries but only a few cancellations, a sign that more airlines are likely to postpone plane buying in the downturn.

"Everybody is looking to push back 2010," Lutze told Reuters on the sidelines of the International Air Transport Association's (IATA) annual meeting in Kuala Lumpur.

"This industry lurches from boom to bust," he said. "We lag the industry on the way down and on the way up."

GE Aviation still has an order backlog worth years of production, Lutze said, after airlines went on an expansion drive earlier this decade with $500 billion worth of future plane orders placed by IATA airlines based on today's list prices, according to Reuters calculations.

But airlines have been hit in the past year's financial crisis by weak passenger and business travel demand, a slide in air cargo trade, trouble getting financing for new planes and by volatile oil prices.

Top plane maker Airbus told Reuters on Monday it would be a tough year for orders and next week's Paris Air Show would be nothing like last year.

GE Aviation, which makes engines for plane makers such as EADS (EAD.PA) unit Airbus and Boeing (BA.N), said in January it aimed to reduce its white-collar staff by more than 1,000 people this year, but did not plan to trim its manufacturing headcount.

The job cuts, off a base of 16,000 salaried employees, would come through attrition, retirement, buyout packages and some layoffs. Fellow engine maker Pratt & Whitney, a unit of United Technologies Corp (UTX.N), is also laying off 1,000 jobs.

Lutze said the focus for GE Aviation was to maintain existing orders, get customers needing engine servicing or parts to pay up, and win new orders.

"Cash is king for us too," said Paris-based Lutze.

The mood at the IATA meeting in the Malaysian capital was fairly grim with the association forecasting industry losses would be $9 billion this year, nearly double a forecast made just three months ago.

Many airline CEOs at the event told Reuters this was the toughest environment they had faced and some said they were considering deferring orders, though most have been careful to avoid mentioning cancellations.

"Iif prices go up while the population does not have (at least nominally correspondingly) increasing incomes, that's not inflation. That is a decline in the standard of living.

"When one lives in a poor country (been there, done that) everything seems expensive - and that has little to do with inflation.

"One of the side effects of defining inflation as a general increase in prices is that it becomes quite easy to mistake growing poverty for inflation. "Inflation" which in reality is a progressive decline in the standard of living is, in fact, deflationary - the economy slows, and people are willing to work for less."

"Iif prices go up while the population does not have (at least nominally correspondingly) increasing incomes, that's not inflation. That is a decline in the standard of living.

"When one lives in a poor country (been there, done that) everything seems expensive - and that has little to do with inflation.

"One of the side effects of defining inflation as a general increase in prices is that it becomes quite easy to mistake growing poverty for inflation. "Inflation" which in reality is a progressive decline in the standard of living is, in fact, deflationary - the economy slows, and people are willing to work for less."

Now add to the equation, prices are going up and the U.S dollar has been dumped so every import must be bought in Euro's.

MOSCOW — Leaders of some of the world’s most powerful economies are gathering on Tuesday to plot how they can exert more control over the global financial system as it takes its first wobbly steps toward recovery.

Yet not an American or Western European will be in the bunch.

The first summit meeting of the so-called BRIC group — Brazil, Russia, India and China — is intended to underscore the rising economic clout of these four major developing countries and their demand for a greater voice in the world. And Russia, the group’s host and ideological provocateur, is especially interested in using the summit to fire a shot across Washington’s bow.

All four countries have expressed varying degrees of discomfort with Washington’s financial stewardship, and are particularly concerned about the value of the dollar at a time of rapidly mounting indebtedness in the United States. At the same time, most economists say the BRIC countries can do little to change the current architecture of the global financial system, and that the outcome of this meeting will be largely symbolic.

The BRIC countries comprise about 15 percent of the world economy and, perhaps more important, have about 40 percent of global currency reserves. Brazil, India and China have also weathered the financial crisis better than the world as a whole.

While they are far from a monolithic group, they are generally united in their frustration with the dollar’s status as the world’s reserve currency, which enables Washington to run budget deficits without fears of facing the kind of budgetary day of reckoning that other countries risk.

The excess dollars fill up in foreign central banks, leaving those countries with a difficult choice: reinvesting the dollars in United States securities or holding them and facing an increase in the value of their own currencies, making their products less competitive in world markets.

While there have been periodic complaints about the dollar through the years, the criticisms from the BRIC countries have become more frequent and more acerbic lately, and have included calls for a supranational currency to replace the dollar.

In March, the prime minister of China, Wen Jiabao, expressed concerns about United States budget deficits, suggesting they might lead to inflation, a weaker dollar and rising yields on Treasuries, any one of which would hurt China’s $1 trillion investment in American government debt. Later that month, the head of the Chinese central bank called for a new international currency to replace the dollar.

For the Kremlin, undermining the dollar as the prevailing medium of exchange reflects a broader Russian belief that the United States exercises a dominance in global affairs that exceeds its diminishing power.

“What we need are financial institutions of a completely new type, where particular political issues and motives, and particular countries, will not dominate,” Russia’s president, Dmitri A. Medvedev, said this month.

Senior officials in most of the BRIC governments — India, which does not depend as much on trade, is something of an exception — assert that while the United States has acted irresponsibly over the last 30 years by amassing too much debt, they will be the ones who suffer.

“The world economy should not remain entangled, so directly and unnecessarily, in the vicissitudes of a single great world power,” said Roberto Mangabeira Unger, Brazil’s minister for strategic affairs. “The developing countries should not have to see painfully accumulated hard-currency reserves fall under the shadow of major devaluations.”

China, Brazil and Russia have said recently that they will purchase notes from the International Monetary Fund to begin diversifying their reserves.

Still, the reality is that even many forceful critics of the dollar see no immediate alternative to it as the vehicle for international trade. No other markets in the world have the depth and liquidity of those in the United States, experts say.

And the four BRIC countries, while newly emboldened, have starkly different economies and relationships with the United States, complicating their attempts to unite. Each of the four also has a currency that either has been historically unstable or is not easily convertible.

“Between the BRIC countries, there is really little in common,” said Yevgeny G. Yasin, head of research at the Higher School of Economics in Moscow. “Each of them has its own destiny, its own special character, and it will be much more difficult for them to agree among themselves than separately with Western countries.”

China, whose economy dwarfs those of the other three, depends on the export of manufactured goods to the United States and Europe. Russia sells oil, natural gas and other natural resources abroad. Brazil focuses on agricultural exports, while India’s growth has been largely based on its domestic market.

The four countries do not necessarily do much business with one another. Only two percent of China’s trade last year was with Russia, though the countries are neighbors, according to official statistics.

At the same time, Brazil announced this year that China had surpassed the United States as its largest trading partner, and said last month that they would look for ways to finance their trade without the dollar.

The very notion of the BRIC nations was conceived in 2001 by an economist for Goldman Sachs, and only then embraced by the countries themselves. Their leaders have conducted informal discussions before, but the event on Tuesday in the central Russian city of Yekaterinburg will mark their first formal gathering, officials said.

Russia has sent somewhat mixed signals recently regarding how determined it is to confront the dollar. Last week, it announced that it would purchase bonds from the International Monetary Fund, but then the finance minister, Aleksei L. Kudrin, acknowledged that the world was not yet ready for another reserve currency.

Vladimir A. Mau, rector of the Academy of National Economy, a government advisory organization in Moscow, said Russia and the other BRIC countries had legitimate worries that the United States was piling up too much debt. But Mr. Mau said that at this point, he doubted that the Kremlin had any recourse.

Mr. Unger, the Brazilian minister, agreed, saying that the BRIC countries do not see replacing the dollar with “heavy-handed, bureaucratic machinery,” such as a global, European-style Central Bank.

In China, popular sympathies are with Russian and Brazilian demands for a robust challenge to American control, analysts said.

Yet there has been no consensus on what a new financial system should look like, and China’s dependence on exports and enormous holdings of dollar-denominated assets give it a vested interest in the status quo, leaving China’s leaders reluctant to pursue far-reaching changes.

While China’s official news media often give sizable attention to coming international gatherings, they have offered little coverage of the BRIC summit meeting.

Xu Xiaonian, an economist at the China Europe International Business School in Shanghai, said the silence reflected a desire not to raise hopes for the meeting. “What can they agree on? So little,” Mr. Xu said. “This meeting is more symbolic than of real effect.”

Vikas Bajaj contributed reporting from New Delhi, Alexei Barrionuevo from Rio de Janeiro, and Keith Bradsher from Hong Kong.

The Obama Administration is presenting a misguided, ill-informed remake of our financial regulatory system that will likely increase the frequency and severity of future financial crisis. While our financial system, particularly our mortgage finance system, is broken, the Obama plan ignores the real flaws in our current structure, instead focusing on convenient targets.

Shockingly, the Obama plan makes no mention of those institutions at the very heart of the mortgage market meltdown – Fannie Mae and Freddie Mac. These two entities were the single largest source of liquidity for the subprime market during its height. In all likelihood, their ultimate cost to the taxpayer will exceed that of the TARP, once TARP repayments have begun. Any reform plan that leaves out Fannie and Freddie does not merit being taken seriously.

While the Administration plan recognizes the failure of the credit rating agencies, is appears to misunderstand the source of that failure: the rating agencies government created monopoly. Additional disclosure will not solve that problem. What is needed is an end to the exclusive government privileges that have been granted to the rating agencies. In addition, financial regulators should end the out-sourcing of their own due diligence to the rating agencies.

Instead of addressing our destructive federal policies at extending homeownership to households that cannot sustain it, the Obama plan calls for increased “consumer protections” in the mortgage industry. Sadly, the Administration misses the basic fact that the most important mortgage characteristic that is determinate of mortgage default is the borrower’s equity. However such recognition would also require admitting that the government’s own programs, such as the Federal Housing Administration, have been at the forefront of pushing unsustainable mortgage lending.

The Administration’s inability to admit to the failures of government regulation will only guarantee that the next failures will be even bigger than the current ones.

The Fed Becomes a Dictator "President Barack Obama is expected Wednesday to propose the most sweeping reorganization of financial-market supervision since the 1930s, a revamp that would touch almost every corner of banking from how mortgages are underwritten to the way exotic financial instruments are traded.

At the center of the plan, which administration officials are referring to as a "white paper," is a move to remake powers of the Federal Reserve to oversee the biggest financial players, give the government the power to unwind and break up systemically important companies -- much like the Federal Deposit Insurance Corp. does with failed banks ...

Lawmakers are expected to take issue with several of the plan's more thorny issues, including how to create a system that won't simply bail out large financial companies when they topple. Giving the Fed more clout -- in light of recent criticism from lawmakers, both Republican and Democratic, of its secrecy and accumulation of power -- will also be a controversial idea."

Question to ponder: Since there is really nothing Fed about the Fed other than it's head is appointed by the POTUS, do you feel like a private banking cartel should have the power to dismantle private companies much like the FDIC does with failed banks?

I fear for you guys. Things are changing so fast, there is no time to mount opposition to half of what is being passed. What the heck is going on with all the Czars? why does obama feel it nessesary to appoint people to power that are not accountable to anyone but obama??

Your stock market is up today on the news that job losses were only 600K and that jobless claims are down by 145k........... because those 145k's benifits have expired. Its like a group of people going over a waterfall while cheering because the drop is only 200ft, 50ft less then expected.

GM wrote: "I don't see how the economy will turn out alright after Obanomics drives us into unimaginable debt... remaining axis of evil nations are running wild...how does this portend a recovery?:

I think of it as Obama-recession-I and Obama-recession-II.

The first was caused by unaffordable global energy, the collapse of US housing market and the scares of the financial meltdown and panic to sell assets ahead of the impending anti-investment policies of the new government. Energy has come back down quickly as a reaction to collapsed global demand (poised to spike again and kill the next recovery). Housing - still a flood of foreclosures with collapsed values but the damage is done and the remaining stock to fail is finite. And there has been a delay for most of the impending economy-killers: tax rates are mostly unchanged, cap/trade doubtful, national healthcare - mostly scaled back (?).

I've read that the new spending has a 0.7 stimulation effect meaning some short term help but not worth the investment, the cost and the debt burden that follows. The catastrophe of the new debt is tomorrow's elephant in the room, but not preventing mild recovery now.

I agree with GM's point that anti-growth policies will kill off the new recovery, but that will be a new recession/stagnation certain to follow enactment of their agenda.

Same for inflation. As we gear up to start measuring the Obama-Misery-Index. the first dollar bills with the Geithner picture are already being fitted for lettering that could just as well say: 'One U.S. Fifty Cent Piece'.

Obama-Pelosi-Leftism can be slowed. Not just by decisive midterm elections, but as Bush proved, opinion and approval polls matter.

Research: No evidence for 'too big to fail' policiesApril 24th, 2009 Jean Helwege, associate professor of finance in Smeal College of Business at Penn State. Photo Credit: Penn State Department of Public Information

The U.S. economy would be better served by letting failing firms file for bankruptcy rather than by bailing them out under presumptive federal policies that deem them to be "too big to fail," according to new research from Penn State's Smeal College of Business.

Washington regulators have justified several recent interventions in the financial realm by warning that firms like Bear Stearns and AIG are too big to fail. Allowing these firms to go bankrupt, the argument goes, would result in fire sales and a domino effect, which pose systematic risks to the entire economy. But Jean Helwege, associate professor of finance, writes that there is little to no evidence to support these too-big-to-fail threats of counterparty risk and fire sales.

In "Financial Firm Bankruptcy and Systematic Risk," which Helwege will present April 18 at the FDIC's annual Derivatives Securities and Risk Management Conference in Arlington, Va., she finds that cascading failures are unlikely to occur because of diversification, and that U.S. bankruptcy law allows for plenty of time to avoid fire sales and dispose of assets slowly.

When justifying bailouts or other government actions in the finance sector, regulators warn of a domino effect: One bank's failure triggers another bank's failure, which triggers other failures, and so on. But, Helwege says, this result is, at best, unlikely in reality.

"While the idea of a domino effect of one firm failing and starting a cascade of addition failures seems eminently plausible," she writes, "the empirical evidence to date suggest that no such domino effect would take place were regulators to abandon TBTF policies." Helwege cites prior research that shows that second firms rarely fail because of a first firm's failure and "that there is never a third firm involved, let alone a fourth, fifth, sixth, seventh, eighth, ninth, or 10th."

"Cascades can only arise when firms' loans to other firms are very large as a fraction of their capital, a notion that is both at odds with bank regulations and good business practices regarding diversification," she writes.

Firms are more likely to be exposed to the same risk because they have made similar poor investment choices; such is the case with the current credit crisis and firms' common exposure to the subprime mortgage market. In this scenario, Helwege argues that "regulatory aid to one firm is of little use to the entire economy. Such assistance might bolster confidence, but clearly increasing confidence among all such firms is more productive than merely attempting to boost confidence in one particularly weak firm."

Helwege writes that the best policy oftentimes is to allow a portion of firms to fail without any assistance. Regulators warn that failures like this will result in fire sales, so they often force failing firms into mergers like the Federal Reserve-assisted takeover of Bear Stearns by JPMorgan Chase. However, Helwege points out that bankruptcy law allows plenty of time for less desirable assets to be sold off slowly so that their true worth can be discerned. In fact, mergers like Bear and JPMorgan, which took place over the course of a weekend, actually allow less time for assets to be properly valued.

"Mergers like the Bear/JP deal are examples of fire sales, not paths to avoiding them," Helwege writes.

She concludes that the best way to maintain stable, liquid, and orderly markets — the ultimate goal of financial regulators — is to allow individual firms to file for bankruptcy and slowly sell off their distressed assets while allowing Congress to find ways to provide more general assistance to the overall economy.